SOX Compliance

SOX informally refers to the Sarbanes-Oxley Act of 2002. Learn more about SOX and SOX compliance for publicly traded corporations today.3 min read

What is SOX?

SOX informally refers to the Sarbanes-Oxley Act of 2002, a piece of legislation created for the purpose of protecting investors from accounting fraud, specifically those that are related to shares sold by publicly traded companies.

The Sarbanes-Oxley Act is a deliberate attempt to mandate strict reforms with regards to how corporations made financial declarations. The law mandates increased vigilance with regards to disclosures related to the financial state of the company, particularly when it comes to earnings and profitability.

It is important to remember that this law regulates publicly traded corporations, those that sell shares of stock to the common people and institutional investors. The investors and potential shareholders will only agree to the listed price of the company's shares based on the company's value such as future earnings and current performance. Thus, there is significant motivation and opportunity for CEOs and financial officers to manipulate data in order to show to the world that it is more beneficial to invest in their company and not their competitors.

The Sarbanes-Oxley Act of 2002 was ratified in response to the accounting scandals of the early 21st century that brought down well-known companies like Enron, Tyco and WorldCom. The actions of unscrupulous men working on behalf of the aforementioned companies resulted in the significant loss of investor confidence with regards to financial statements.

In other words, all the declaration of CEOs and corporate leaders had no more value, until the system could be overhauled and regulated to the point that investors are absolutely sure of the reliability of the information released to the general public.

What Should Publicly Traded Companies Do?

It is critical that corporations abide by SOX and adjust their actions to make sure they are in compliance with SOX.

Here are some of the most important things a corporation could do:

Enforce a strict code of ethics that covers a wide array of ethical issues that can arise and make sure everyone in the organization is aware of the rules. This way, the company will have its bases covered in the event of any disloyalty.

Know exactly who your board members are. Your board members must answer to third parties and more importantly, the shareholders who rely on company financials. Shareholders require board members to be financially literate especially because they can be sued by creditors. Any fraudulent act by a board member can cost the company a fortune, so be sure there is no existing conflict of interest.

Create the right kind of committees. Well-governed companies have a variety of committees that ensure financials are flowing legally and there are no fraudulent activities taking place. To start off, make sure to have a compensation committee, an audit committee, a disclosure committee, and a nominating committee.

Keep track of how you raise capital. Investors will be more likely to invest their time and money in your corporation when your company’s compliance with SOX is documented. This proves to investors that there is a high chance the company will grow because it operates in an ethical and properly controlled manner.

Keep your electronically stored data organized. In the event the company must be investigated, corporations must be able to produce email messages and all pertinent electronic records to investigators. Since these would be considered evidence, any missing electronic information could create the impression that evidence has been tampered with.

Determine whether SAS 70 applies to your company. Your clients may ask you for a SAS 70 report if they are publicly traded companies themselves. They may ask you for this documentation to prove that they only outsource to service providers like yourself who have good internal controls put in place.

Know when it is time to file an 8-K report. The 8-K form is the form that public companies use to report the occurrence of significant corporate events, usually transactions or an occurrence of major significance. Some examples of events that trigger a filing include:

Entering into or Terminating a Material Agreement

Bankruptcy

Acquisition of assets

Election of directors

Amendments to Articles of Incorporation

Many more events can trigger a filing, so make sure you refer to an 8-K form for further detailed instructions.

Compliance with the above will help combat any corruption within a corporation and repel lawsuits. These practice principles will not only enable corporations to keep strict tabs on their financials, but will also lead to high growth potential while maintaining a clean reputation.

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